Divergence Trade Setups - RSI Indicator

Divergence is one of the trade set-ups used by traders. Divergence trade setup involves looking at a chart & one more trading indicator. For our example we shall use the RSI.

To spot this divergence trade setup find two chart points at which price makes a new swing high or a new swing low but the RSI indicator does not, indicating a divergence between price & momentum.

Example:

In the chart below we spot two chart points, point A and point B (swing highs)

Then using RSI indicator we check the highs made by the technical indicator, these are highs that are directly below Chart points A and B.

We then draw one line on the chart & another line on the RSI technical indicator.

RSI Divergence Trade Setup

How to spot divergence setup

In order to spot this setup we look for the following:

HH = Higher High - two highs but the last is higher

LH = Lower High : 2 highs but the last is lower

HL = Higher Low : 2 lows but last one is higher

LL = Lower Low : two lows but the last is lower

First let us look at the illustrations of these terms

Divergence Trade Terms

Divergence Trade Terms

There are 2 types of divergence trade strategies:

1. Classic divergence trade setup
2. Hidden divergence trade setup

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